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Aurora Cannabis was often in the news in December 2017 and at the start of this year. Rumours that Aurora would acquire its competitor Cannimed – the transaction was finalised on 24 January for the tidy sum of $860 million – have sent its share price soaring. It has since fallen, but the merger gave Aurora Cannabis access to almost 20% of the medical marijuana market in Canada.
The company is notable for the fact that it was in the black for three of the last four quarters. This sets it apart from its competitors who are currently less profitable, such as Canopy Growth. While profitability isn’t a decisive factor for investors, the industry is just getting started and is in the investment phase. And despite several agreements between Aurora and institutional partners, it is still much less well-known than Canopy Growth among regular users. Many analysts recommend holding shares, as they are already well-valued.
“We want to dominate the world.” In September 2016, CEO of Canopy Growth Bruce Linton unveiled his worldly ambitions. Instead of finding him over the top, shareholders cheer him on. That’s because Canopy doesn’t stop growing – in success, acquisitions and expansion projects.
It all started in 2014 when a startup called Tweed Marijuana, renamed Canopy in 2015, received authorisation to produce and sell medicinal cannabis in Canada. Tweed purchased a former chocolate factory in Smiths Falls, Ontario, to grow marijuana. But the facility, which is 46,000 m2, wasn’t good enough for Linton. In 2015, Tweed acquired its competitor Bedrocan for $61 million. A year later, it acquired another industry heavyweight, Mettrum, for $430 million. The company became the first cannabis unicorn, with a valuation of more than $1 billion.
With these acquisitions, Canopy became the leader of Canada’s cannabis industry. Most analysts recommend purchasing shares, which could still rise. Currently, Canopy holds 30% of the medicinal cannabis market in Canada and analysts expect it will hold the same percentage of the recreational market when it is legalised in July. To meet the increased demand, Canopy announced in October that it would double its production between now and this summer.
And the international market will be another growth opportunity. After choosing American rapper Snoop Dogg as the face of its advertising, Canopy spread to Brazil and Australia in 2016 and even Europe, acquiring German company Medcann in November 2016. “Canopy is an attractive investment,” said Martin Landry, analyst at GMP Securities. “It’s very well-positioned to conquer the global market.”
But this fast-paced growth comes at a cost: in 2017, Canopy posted an operational loss of CAD 17 million(ed. note: CHF 12.7 million). But Landry says the promising partnership with alcohol producer Constellation Brands, which brought in close to $200 million in October, is a game changer: “This influx of funds will allow Canopy to carry out its ambitious expansion plan. It will also open the door to a juicy new business: cannabis-infused drinks.”
“I really like MedReleaf,” said Martin Landry, analyst at GMP Securities. While the company, based in Markham, north of Toronto, is lesser-known than its competitors Canopy and Aphria, it’s not lacking in opportunities. MedReleaf hopes to take part of the recreational market. To do so, the company has begun a substantial development programme. In February 2018, it announced that it purchased more than 660,000 m2 of land (164 acres) which is expected to boost its production capacities from 35,000 kg of cannabis per year in 2017 to 140,000 kg by the end of 2018.
MedReleaf is also targeting the international medicinal cannabis market. Already present in Australia since 2017, the company announced a partnership with German company Cannamedical in March 2018. It will be one of the main suppliers to German pharmacies. Like most analysts, Martin Landry “recommends purchasing shares”, especially because they seem undervalued compared to the competition.
“Aphria has many advantages,” said Noel Atkinson of Clarus Securities. “This well-established company produces 240,000 kg of cannabis per year. The increased volumes combined with a sophisticated production process make it possible for Aphria to post the lowest production costs on the market. Additionally, as its management team is very competent, it has an excellent relationship with its clients.”
On its website, Aphria clearly plays the medicinal marijuana card and sells its product dried in a jar or as various oils. But according to Noel Atkinson, the company is ready to transform its product line and marketing strategy starting on 1 July: “The recreational cannabis business is expected to make up 90% of the market,” said the analyst. “The big companies will shift to focus on this segment.”
Aphria has a solid structure. It has entered into several partnerships over the past few years, such as with Canadian pharmacy Shoppers Drug Mart, which will sell Aphria products online. In January, it also acquired a sizeable competitor, Nuuvera, based in Ontario, for $330 million. Nuuvera is very well positioned internationally, especially in Germany and Italy, anticipating future legislative breakthroughs in these countries. Analysts recommend purchasing Aphria shares, or at the very least, they believe it will outperform the market.
With a production area of less than 5,000 m2 in 2017, CannTrust is the David to Canopy and MedReleaf’s Goliath. But the company, which went public on the Toronto exchange in August 2017, is growing rapidly. It just completed a 23,000 m2 extension and a second plot is expected to be operational in June 2018. The production area will reach just under 50,000 m2, or a tenfold increase in just one year.
To ensure its growth, CannTrust can count on its trusted partner: Apotex. Little known on this side of the Atlantic, Apotex is the fifth largest pharmaceutical company in Canada. Together, the two are developing new products derived from cannabis. Globally, CannTrust entered into a joint venture with Denmark’s Stenocare. This transaction will make it possible for CannTrust to export its production to Denmark, which has legalised medicinal marijuana as of 1 January 2018.
“CannTrust is a small, undervalued player,” said Martin Landry of GMP Securities. “I recommend purchasing shares, which have a price target of $17, compared to less than $10 currently.”
After going public last year, Hydropothecary has made a name for itself among investors. The Quebec company has emerged as the leader in the premium segment, offering products that are often unique on the market, well-packaged and duly authorised by the authorities. For example, it sells cannabis capsules, oils, powders and flavoured sprays.
This singular positioning could be very beneficial to Hydropothecary once recreational cannabis is legalised. In the meantime, the young company received a record order in February: the Quebec government, which will pilot cannabis sales in the province, purchased 20,000 kg of marijuana.
Substantial expansion work is currently underway at the company’s facilities in Gatineau. The growing area is expected to reach 120,000 m2 in December, allowing for a production of 100,000 kg of dried cannabis per year. Because of the cheap cost of land, water and electricity in the region, Hydropothecary has some of the lowest production costs on the market. The only issue is that it has a higher risk exposure if there are any problems with its single location.
Most analysts recommend purchasing shares, such as Vahan Ajamian of Beacon Securities, who set the price target at $8.50. Given the company’s low capitalisation – compared to industry heavyweights – the analyst doesn’t rule out the possibility that it could be acquired by a competitor.
Insys is changing direction. The company, which is known for its flagship product Fentanyl, is rethinking its strategy amidst a big scandal. Founder John Kapoor is accused of bribing doctors to prescribe the analgesic, which is 100 times stronger than morphine – leading to countless overdoses. While the entrepreneur pleaded not guilty, Insys announced that it would stop focusing on opioids and has switched to cannabinoids, the molecules present in marijuana.
The company sells Dronabinol, a synthetic form of natural THC that is authorised in the US to treat AIDS-related anorexia. But sales of Dronabinol don’t make up for the losses caused by Fentanyl. “Insys’ revenue is declining and its equity has disappeared,” said Jérôme Schupp, an analyst at Prime Partners. “Currently Insys is not a commercial or market success.” But it’s not necessarily a bad investment: due to the current low capitalisation, most analysts recommend purchasing shares.
Unlike other pharmaceutical companies such as Insys or Cara Therapeutics, US-based Zynerba Pharmaceuticals is focused solely on developing drugs using synthetic cannabinoids – the active molecules naturally present in marijuana. Currently, the company has two products in its pipeline: ZYN001 and ZYN002. During clinical trials, the first drug, which contains THC, showed promising results in treating Tourette’s Syndrome. But it’s still in an early stage of development and therefore very far from being found on pharmacy shelves.
ZYN002, a gel made from synthetic cannabidiol (CBD), is further along in the process. During phase II clinical trials (i.e. on a limited number of patients), its application on skin seemed beneficial in treating Fragile X Syndrome (a genetic disorder) and certain types of epilepsy. Analysts believe these results are promising and recommend purchasing shares.
However, the investment isn’t entirely risk-free. As all of its products are currently in development, Zynerba has no revenue. It does have enough capital to continue its research until 2019. Beyond that, there are no guarantees.
The virtues of cannabis have been well-known since ancient times. The Romans, for example, used it to soothe women during childbirth, and the plant was standard until the 1950s. And then the 1960s happened and marijuana was banned around the world. Pharmaceutical companies abandoned cannabis for other pain medicines, such as opioids.
Was that the end of it? Definitely not. In 1998, researchers Geoffrey Guy and Brian Whittle received authorisation from the British government to grow cannabis in order to study its pharmacological properties. Together, they created GW Pharmaceuticals, which conducted its first clinical trial less than one year later. Their research led to the creation of Sativex, the first cannabis- based drug (it contains THC and CBD). After more than 20 clinical trials on more than 3,000 patients, Sativex received market authorisation in around 30 countries, including Switzerland, to treat spasms associated with multiple sclerosis. GW is also developing Epidiolex, a drug made from CBD extracted from cannabis. This product is very promising and is pending market authorisation to treat a severe form of epilepsy.
But all this research is costly. “In 2017, GW lost close to $175 million and its equity is in freefall,” warned Jérôme Schupp, an analyst at Prime Partners. Nevertheless, analysts recommend purchasing shares. The risky bet could pay off if the Food and Drug Administration (FDA) authorises Epidiolex. The decision will be made in June 2018.